oversight

KC-46 Tanker Aircraft: Acquisition Plans Have Good Features but Contain Schedule Risk

Published by the Government Accountability Office on 2012-03-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Committees




March 2012
             KC-46 TANKER
             AIRCRAFT
             Acquisition Plans
             Have Good Features
             but Contain Schedule
             Risk




GAO-12-366
                                                 March 2012

                                                 KC-46 TANKER AIRCRAFT
                                                 Acquisition Plans Have Good Features but Contain
                                                 Schedule Risk
Highlights of GAO-12-366, a report to
congressional committees




Why GAO Did This Study                           What GAO Found
Aerial refueling is essential to global          The KC-46 program has established its acquisition strategy for development and
U.S. military operations. The backbone           production, including total cost, procurement quantities, and key milestone dates.
of the nation’s tanker forces—the KC-            The program is using a $4.4 billion fixed-price incentive (firm target) development
135 Stratotanker—is over 50 years old            contract that provides contractor incentives to control costs and limits the
on average with age-related problems             government’s liability for increased costs over a certain amount. While estimated
and increasing support costs that could          development costs are currently $900 million higher than the February 2011
ground the fleet. Given this, the Air            contract award amount, the government’s share of these extra costs is limited to
Force has initiated the $51.7 billion            about $500 million. The program has identified key performance parameters, but
KC-46 program to start replacing the
                                                 has not yet fully implemented the metrics for tracking their achievement.
current fleet. Plans are to produce 18
tankers by 2017 and 179 aircraft                 There is broad agreement that KC-46 schedule risk is a concern. In GAO’s
through 2027. Other follow-on                    assessment, significant concurrency, or overlap, among development and
procurements are anticipated to                  production activities add risk to the program. The Air Force and contractor
replace all KC-135s (see graphic).               have assessed overall schedule risk as moderate, citing concerns about
The National Defense Authorization               software and the ability to complete development flight testing on time.
Act for Fiscal Year 2012 requires GAO            Further, the DOD’s chief testing official finds the testing schedule not
to annually review the KC-46 program             executable as currently planned. While designing a new tanker using a
through 2017. This report addresses              modified commercial platform is not as technically challenging as a more
(1) the program’s acquisition strategy,          revolutionary weapon system, the program still faces some technical risks,
including its contracting approach; (2)          including technologies that have not yet been demonstrated during flight.
the major schedule and technical risks;
and (3) the extent the program’s                 The KC-46 program’s acquisition strategy provides a good framework for
acquisition strategy and documentation           meeting GAO’s knowledge-based best practices, and generally adheres to
comply with policy, legislation, and             defense policy guidance and recent acquisition reform legislation. DOD
best practices. To address these                 waived the requirement for a preliminary design review before the program
areas, GAO reviewed key documents                began system development and demonstration, but this design review is
on the program’s contract and cost               planned for March 2012. Although the program’s three critical technologies
baseline. GAO discussed the major                have not yet achieved the level of maturity indicated in best practices, they
schedule and technical risks with                have reached a level of maturity consistent with DOD policy. Given that the
program office officials and examined            KC-46 is one of only a few major programs in recent years to use a fixed-
an independent technology readiness              price incentive contract and the importance of tanker replacement to
assessment. GAO also assessed the                national security, rigorous monitoring of the program’s progress will be
acquisition plan and required                    essential.
documentation to determine
compliance with acquisition legislation,         Notional Representation of Air Force Plans to Replace Tanker Fleet
policy, and best practices.

What GAO Recommends
GAO recommends DOD leadership
monitor the progress and outcomes of
this contract to provide lessons learned
for future acquisition programs, and the
program fully implement metrics to
track achievement of key performance
parameters. DOD fully concurred.

View GAO-12-366. For more information,
contact Michael J. Sullivan at (202) 512-4841,
or sullivanm@gao.gov.

                                                                                              United States Government Accountability Office
Contents


Letter                                                                                    1
               Background                                                                 2
               KC-46 Program Has Established Its Acquisition Strategy                     7
               Key Events in Program Schedule Are Concurrent and Technical
                 Challenges Exist                                                       12
               With Some Exceptions, the Program’s Development Strategy
                 Generally Adheres to Best Practices, Acquisition Reform
                 Legislation, and DOD Policy                                            18
               Conclusions                                                              24
               Recommendations for Executive Action                                     25
               Agency Comments                                                          25

Appendix I     Scope and Methodology                                                    28



Appendix II    KC-135 Fleet Capabilities Compared to KC-46 Planned Capabilities
               for Aerial Refueling                                                     30



Appendix III   DOD and KC-46 Program Office Implementation of Applicable
               Sections of the 2009 WSARA                                               31



Appendix IV    KC-46 Program Compliance with Key Requirements Documents                 33



Appendix V     Comment from the Department of Defense                                   34



Appendix VI    GAO Contacts and Acknowledgments                                         39



Tables
               Table 1: Comparison of Current KC-135 versus Planned KC-46
                        Performance Capabilities                                          7
               Table 2: Approved KC-46 Quantities, Cost, and Schedule                     8




               Page i                                       GAO-12-366 KC-46 Tanker Aircraft
          Table 3: KC-46 Development Contract Values and Current
                   Estimates                                                                         9
          Table 4: Description of KC-46 Key Performance Parameters                                  12


Figures
          Figure 1: Notional Representation of Plan for Air Force Tanker
                   Fleet Replacement                                                                5
          Figure 2: Conversion of Boeing 767-2C into KC-46 Aerial Refueling
                   Tanker                                                                           6
          Figure 3: Planned KC-46 Program Concurrency between
                   Development and Production                                                       13
          Figure 4: KC-46 Planned Program Events Compared to GAO Best
                   Practices                                                                        21




          Abbreviations

          CAPE              Cost Assessment and Program Evaluation
          DOT&E             Director, Operational Test & Evaluation
          DOD               Department of Defense
          EMD               Engineering and Manufacturing Development
          FAA               Federal Aviation Administration
          ICE               Independent Cost Estimate
          KPP               Key Performance Parameters
          OSD               Office of the Secretary of Defense
          SCP               Service Cost Position


          This is a work of the U.S. government and is not subject to copyright protection in the
          United States. The published product may be reproduced and distributed in its entirety
          without further permission from GAO. However, because this work may contain
          copyrighted images or other material, permission from the copyright holder may be
          necessary if you wish to reproduce this material separately.




          Page ii                                                  GAO-12-366 KC-46 Tanker Aircraft
United States Government Accountability Office
Washington, DC 20548




                                   March 26, 2012

                                   Congressional Committees

                                   Aerial refueling—the transfer of fuel from an airborne tanker to a receiving
                                   aircraft—is critical to global U.S. military operations, allowing its aircraft to
                                   fly further, stay airborne longer, and carry more weapons, equipment, and
                                   supplies. According to the Air Force, the national security strategy cannot
                                   be executed without aerial refueling. Military operations in Iraq and
                                   Afghanistan during the last decade depended on tankers to get the
                                   military’s fighters, bombers, and airlifters to the Middle East and operate
                                   while there. That said, the backbone of the U.S. large tanker fleet, the
                                   KC-135 Stratotanker, is over 50 years old on average and costing
                                   increasingly more to maintain and support. In 2004, we reported on
                                   Department of Defense (DOD) concerns that age-related problems could
                                   potentially ground the aerial refueling fleet and cripple support to combat
                                   forces. 1 In February 2011, the Air Force awarded a contract that began a
                                   $51.7 billion effort to replace its fleet by starting the KC-46 program. 2 The
                                   Air Force plans to develop, test, and procure 18 KC-46 tankers by 2017,
                                   and then go on to procure a total of 179 aircraft to replace about two-fifths
                                   of the KC-135 fleet.

                                   The National Defense Authorization Act for Fiscal Year 2012 requires that
                                   we review the KC-46 program and report by March 1 each year, ending in
                                   2017. 3 In response, this report examines (1) the program’s acquisition
                                   strategy, including its contracting approach; (2) the major schedule and
                                   technical risks faced by the program; and (3) the extent to which the
                                   program’s acquisition strategy and documentation comply with DOD
                                   acquisition policy, legislation, and commercial best practices. To address
                                   these areas, we reviewed key documents outlining key aspects of the
                                   program’s acquisition strategy. We also discussed the major program
                                   schedule and technical risks with program office officials and examined


                                   1
                                    GAO, Military Aircraft: DOD Needs to Determine Its Aerial Refueling Aircraft
                                   Requirements, GAO-04-349 (Washington, D.C.: June 4, 2004).
                                   2
                                    The KC-46 designation refers to the acquisition program, while the designation for the
                                   actual tanker aircraft being procured is the KC-46A. However, for purposes of this report,
                                   we will use the KC-46 designation throughout.
                                   3
                                    Pub. L. No. 112-81, § 244.




                                   Page 1                                                    GAO-12-366 KC-46 Tanker Aircraft
             an independent technology readiness assessment. We also reviewed the
             program’s acquisition plan and required documentation to determine the
             extent it complied with relevant acquisition legislation, policy, and best
             practices. We conducted this performance audit from September 2011 to
             March 2012 in accordance with generally accepted government auditing
             standards. Those standards require that we plan and perform the audit to
             obtain sufficient, appropriate evidence to provide a reasonable basis for
             our findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives. See appendix I for more
             information on our scope and methodology.


             While several types of aircraft provide aerial refueling services, the
Background   principal effort is currently carried out by the Air Force fleet of 414 KC-135
             aircraft. Originally fielded in the 1950s, KC-135 aircraft are considered the
             mainstay of the tanker fleet, supporting combat air assets, deployment of
             airlift aircraft, and nuclear combat refueling missions. With an average
             age of nearly 51 years and more than 16,000 flight hours on each aircraft,
             the KC-135s will approach over 80 years of age when the fleet is retired
             as projected in the 2040 time frame. In 1981, the Air Force began
             supplementing its fleet of KC-135s with the procurement of 60 KC-10s (of
             which 59 remain in service today), multi-role aircraft that transport air
             cargo and provide refueling. Much larger than the KC-135, the KC-10
             provides both boom and hose and drogue refueling capabilities 4 on the
             same flight and can conduct transoceanic missions. The KC-10s now
             average about 27 years of age with more than 26,000 flight hours on
             each, and their service life is expected to end around 2045. The Air Force
             has upgraded and modified both fleets in recent years, providing
             improved avionics and new engines on the KC-135 along with newer
             communication systems to comply with international and federal air traffic
             requirements.




             4
              Currently, Air Force fixed-wing aircraft refuel with the “flying boom.” The boom is a rigid,
             telescoping tube that an operator on the tanker aircraft extends and inserts into a
             receptacle on the aircraft being refueled. Air Force helicopters, and all Navy and Marine
             Corps aircraft refuel using the “hose and drogue.” The “hose and drogue” system involves
             a long, flexible refueling hose stabilized by a drogue (a small windsock) at the end of the
             hose.




             Page 2                                                     GAO-12-366 KC-46 Tanker Aircraft
                     In 1996, GAO reported that the aging KC-135s would eventually need to
                     be replaced. 5 We recommended that DOD consider looking at dual-use
                     aircraft—which could be used as a tanker or a cargo carrier, depending
                     on their missions. In 2001, the Air Force reported that the KC-135 fleet
                     would incur much greater operations and maintenance (O&M) costs
                     between 2001 and 2040, but that it would be structurally sound to 2040. 6
                     Air Force officials stated in 2005 that engine strut fatigue caused by long-
                     term heat exposure and corrosion posed the greatest threat to the KC-
                     135 fleet and O&M costs were increasing. These costs, nearly $2 billion
                     in fiscal year 2010, are expected to grow to $6 billion per year by fiscal
                     year 2018. The 2012 Air Mobility Master Plan also expresses concerns
                     that advanced adversary threats pose greater risk to the current tanker
                     fleet and that the KC-135 fleet lacks defensive capabilities required to
                     operate and succeed against either current or future threats.


Tanker Replacement   Plans to begin replacing the KC-135 fleet were first developed in 2001
History              with Congress authorizing a pilot program to lease 100 Boeing 767
                     aircraft modified for aerial refueling, subsequently called the KC-767A
                     aircraft. 7 This leasing deal was ultimately canceled, however, after a DOD
                     investigation found that a senior Air Force official improperly approved the
                     leasing deal.

                     After the canceled tanker leasing deal, an Analysis of Alternatives (AOA) 8
                     was conducted which determined that use of a tanker based on a
                     commercial aircraft would be the most cost-effective way to replace the
                     Air Force’s aging fleet of KC-135s. In January 2007, DOD issued a
                     request for proposal (RFP) 9 to procure 179 such tankers. On February


                     5
                      GAO, U.S. Combat Air Power: Aging Refueling Aircraft Are Costly to Maintain and
                     Operate, GAO/NSIAD-96-160 (Washington, D.C.: Aug. 8, 1996).
                     6
                      “KC-135 Economic Service Life Study,” Technical Report F34601-96-C-0111, Feb. 9,
                     2001.
                     7
                      Pub. L. No. 107-117, § 8159.
                     8
                      The AOA is an important element of the defense acquisition process. An AOA is an
                     analytical comparison of the operational effectiveness, suitability, and life-cycle cost (or
                     total ownership cost, if applicable) of alternatives that satisfy established capability needs.
                     Defense Acquisition Guidebook, 3.3.1.
                     9
                      The Federal Acquisition Regulation (FAR) provides for the use of RFPs in negotiated
                     acquisitions to communicate government requirements to prospective contractors and to
                     solicit proposals. FAR § 15.203(a).




                     Page 3                                                      GAO-12-366 KC-46 Tanker Aircraft
29, 2008, the Air Force awarded the first contract of a three-phased
approach, called the KC-45, to a partnership between Northrop Grumman
and the European Aeronautic Defence and Space Company (EADS) to
build four aircraft for testing and then manufacture 175 production aircraft.
Boeing, the competing bidder, filed a protest with the Government
Accountability Office (GAO) protesting the Air Force’s decision. In June
2008, GAO determined that the Air Force had made significant errors,
including not assessing the relative merits of the proposals in accordance
with the evaluation rules and criteria set out in the RFP, which could have
affected the outcome of the competition. 10 As a result, the Office of the
Secretary of Defense (OSD) directed the Air Force in September 2008 to
terminate the contract and conduct a new competition.

On February 24, 2010, the Air Force released a significantly revised KC-X
RFP. One year later, Boeing won the new competition to develop and
build 179 new KC-46s at an estimated cost of $51.7 billion. The
development portion of the contract to design and build 4 test aircraft, and
then bring those aircraft to a final production configuration, is valued at
$4.4 billion. The Air Force plans to exercise two contract options for 19
initial production aircraft that are required, in part, for the contractor to
meet the requirement to produce and deliver 18 aircraft by 2017.
Additional contract options can be exercised to allow for production of the
remaining 156 aircraft through year 2027 at a target rate of 15 aircraft per
year. Separate competitions are planned for later acquisitions, called the
KC-Y and KC-Z phases, to replace the rest of the KC-135 fleet. Figure 1
below depicts a notional schedule of how the Air Force plans to replace
its current KC-135s over the next several decades.




10
 The Boeing Company, B-311344 et al., June 18, 2008, 2008 CPD ¶ 114.




Page 4                                             GAO-12-366 KC-46 Tanker Aircraft
Figure 1: Notional Representation of Plan for Air Force Tanker Fleet Replacement




                                         Note: KC-46 build-up represents planned production quantities, not planned deliveries and does not
                                         include four development test aircraft.


KC-46 Program                            The KC-46 program is planning to turn a Boeing commercial aircraft (the
                                         767-2C) into a militarized KC-46 tanker that is more capable than the KC-
                                         135. Boeing is currently developing the 767-2C, which is based on a
                                         Boeing 767 model airframe modified to include a cargo door, new fuel
                                         tanks and an advanced flight deck display borrowed from the new Boeing
                                         787 aircraft. Militarization of this airframe includes the addition of the
                                         refueling boom, centerline drogue system with wing refueling pods, a
                                         remote air refueling operator station that includes panoramic three-
                                         dimensional displays and threat detection and avoidance systems using
                                         advanced software to automatically re-route the aircraft away from
                                         threats. Program officials consider the integration of military hardware and
                                         software on a commercial platform to be the primary technical risk. Figure
                                         2 below shows the intended conversion of the 767-2C into the KC-46
                                         aerial refueling tanker.




                                         Page 5                                                         GAO-12-366 KC-46 Tanker Aircraft
Figure 2: Conversion of Boeing 767-2C into KC-46 Aerial Refueling Tanker




The new tanker is also planned to have several capabilities that existing
KC-135s do not have. For example, the KC-46 is expected to be able to
refuel in a variety of night-time settings, including covert (not easily
visible) mode which the KC-135 cannot do. In addition, it is intended to
have countermeasures which protect large aircraft from infrared missile
threats. The KC-46 fleet will also have more aircraft with the capability to
refuel two aircraft at the same time, with the entire fleet able to conduct
this mission, and the ability to carry more cargo, passengers, and medical
patients. Table 1 compares the current capabilities of the KC-135 with the
planned capabilities of the new KC-46 tanker. (More detail on the planned
capabilities is included in appendix II.)




Page 6                                             GAO-12-366 KC-46 Tanker Aircraft
                           Table 1: Comparison of Current KC-135 versus Planned KC-46 Performance
                           Capabilities

                            Key capability                       KC-135                            KC-46
                            Primary function                     Aerial refueling and airlift with Aerial refueling and airlift with
                                                                 200,000 lbs. total fuel for       207,672 lbs. total fuel for
                                                                 refueling                         refueling
                            Boom refueling                       Hydraulic system with 1,176       Computer assisted with 1,200
                                                                 gallons per minute refueling      gallons per minute refueling
                                                                 rate                              rate
                            Hose and drogue                      Permanent system does not         Permanent centerline hose and
                            refueling                            exist—must be temporarily         drogue system
                                                                 added
                            Refueling of two aircraft Limited to 20 tankers with the               All tankers have the capability
                            at the same time          capability to attach wing pods               to attach wing pods and
                                                      and conduct multipoint                       conduct multipoint refueling,
                                                      refueling of two aircraft                    but only 46 sets of wing pods
                                                                                                   will be procured
                            Cargo/passenger/                     6 cargo pallets, 53               18 cargo pallets, 114
                            medical patient                      passengers, 44 medical            passengers, 58 medical
                                                                 patients                          patients
                            Defensive systems                    Does not possess sufficient       Protection from nuclear,
                                                                 systems                           infrared (heat seeking
                                                                                                   missiles), and biochemical
                                                                                                   threats
                            Night-time refueling                 Restricted in tactical missions Able to refuel in tactical
                                                                                                 missions
                           Source: GAO presentation of Air Force data.



                           The KC-46 program has established its acquisition strategy for aircraft
KC-46 Program Has          development and production, which includes a total cost estimate of
Established Its            $51.7 billion, aircraft quantities to be procured, key milestone dates, and
                           test and manufacturing schedules. The KC-46 program is using a fixed-
Acquisition Strategy       price contract for development, designed to provide a profit incentive for
                           the contractor to control costs, while limiting government liability for
                           increased costs over a certain amount. The program has also identified
                           nine key performance parameters (KPP) critical to enabling the KC-46 to
                           meet mission requirements, but has not yet fully implemented metrics that
                           will be used to track the achievement of these KPPs.


KC-46 Approval of          In February 2011, senior defense leaders approved the KC-46 program’s
Baseline Cost, Schedule,   entry into the acquisition process at the Engineering and Manufacturing
and Aircraft Quantities    Development (EMD) phase (called Milestone B). Table 2 summarizes
                           planned quantities, costs, and milestone dates approved at that time.



                           Page 7                                                                 GAO-12-366 KC-46 Tanker Aircraft
Table 2: Approved KC-46 Quantities, Cost, and Schedule

Expected quantities
Development quantities                                                                 4
Procurement quantities                                                              175
Total quantities                                                                    179


Cost estimates (then-year dollars in millions)
Development                                                                     $7,149.6
Procurement                                                                   $40,236.0
Military Construction                                                           $4,314.6
Total program acquisition                                                     $51,700.2


Unit cost estimates (then-year dollars in millions)
Average program acquisition                                                      $288.8
Average procurement                                                              $229.9


Key milestones
Program contract award (Milestone B)                                      February 2011
Low rate initial production (Milestone C)                                   August 2015
Initial operational test and evaluation start                                  May 2016
Full rate production decision                                                 June 2017
Required assets available (18 aircraft operationally ready)                 August 2017
Source: GAO presentation of Air Force data.



Defense officials established a total acquisition program baseline cost of
$51.7 billion. The development cost estimate of $7.1 billion includes $5.3
billion for the development contract and $1.8 billion for other costs,
including air crew and maintenance training systems, operational testing,
and program office support. The procurement cost estimate of $40.2
billion is based on projected prices for procuring 175 aircraft in annual
quantities of up to 15 aircraft through fiscal year 2027. At this price,
aircraft would cost almost $230 million on average. Military construction
costs to build hangars, maintenance and supply shops, and other facilities
to house and support the KC-46 fleet are estimated at $4.3 billion.
Following a successful initial production decision, the Air Force plans to
exercise the first two production contract options. After the options are
exercised, Boeing will be required to provide the Air Force with a total of
18 operationally ready aircraft 78 months after development contract




Page 8                                                    GAO-12-366 KC-46 Tanker Aircraft
                          award, which would be by August 2017. 11 Further contract options are
                          planned to continue through 2027, until a total of 179 aircraft are bought.


Development Contract      In February 2011, the Air Force awarded Boeing a fixed-price contract to
Includes Features to      develop, test, and manufacture four KC-46 aircraft. The specific contract
Control Cost, Schedule,   arrangement used by the KC-46 program is a fixed-price incentive (firm
                          target) (FPIF) contract. Table 3 provides development contract details
and Performance Risk      and the current contract and government estimates to complete
                          development.

                          Table 3: KC-46 Development Contract Values and Current Estimates

                              Dollars in millions
                                                                                         FPIF contract line items                  Total contracta
                              Contract amounts           Target price                                            $4,327.3                    $4,393.9
                                                         Ceiling price                                           $4,831.0                    $4,897.6
                              Current estimates          Contractor                                              $5,096.9                    $5,163.5
                              by:
                                                         Government                                              $5,284.4                    $5,351.0
                          Source: KC-46 Selected Acquisition Report, the Federal Procurement Data System – Next Generation, and GAO calculations.
                          a
                           Total contract amounts are different from FPIF amounts because they include two firm fixed price
                          contract line items, one for technical data license rights and one for testing.


                          The contract is designed to provide a profit incentive for the contractor to
                          control or even reduce costs. It specifies target cost, target price, and
                          ceiling price amounts, with the latter being the maximum amount that may
                          be paid to the contractor. The target price is $4.4 billion and the ceiling
                          price $4.9 billion. The contract specifies a 60/40 incentive ratio for sharing
                          savings in the event of underruns, or sharing cost in the event of
                          overruns. The government’s share is 60 percent while Boeing’s is 40
                          percent. Cost sharing ends when the contract price reaches the $4.9
                          billion ceiling. Thereafter, provided the Air Force is not responsible for any
                          of the additional costs associated with the overruns, the contractor would
                          be responsible for all additional costs associated with the overruns and
                          would be obligated to perform the contract. If the Air Force is responsible



                          11
                             According to program officials, the government will hold Boeing accountable to the
                          terms and conditions of the contract and seek consideration from Boeing if they do not
                          perform to the contract requirements.




                          Page 9                                                                           GAO-12-366 KC-46 Tanker Aircraft
for any of the cost overruns, they may have to renegotiate the terms and
conditions of the contract with Boeing. The KC-46 program’s current
government estimate to complete development is $5.3 billion, which is
about $900 million more than the contract target price and about $400
million more than the ceiling price. The Air Force believes this additional
$400 million may be necessary to cover schedule risk for the remainder of
development, and if it is, Boeing must pay these costs.

According to program officials, a change in system requirements,
although unlikely, would be a circumstance that could increase the Air
Force’s exposure to additional costs. As stated in a memorandum from
the OSD Office of Cost Assessment and Program Evaluation, 12 the
biggest risk to the KC-46 program is the Department’s ability to minimize
changes to the contract. The memorandum maintains that on the whole,
DOD has demonstrated limited ability to maintain stable requirements and
limit changes to program technical baselines on previous complex
weapon system programs, and that minimizing such change is essential
to the success of the KC-46. In view of these concerns, program officials
state it is very unlikely any requirements will be changed, and to help
ensure this, they have instituted a process to control changes.
Specifically, any engineering or contract changes affecting system
requirements or having the potential to impact program cost, schedule,
and performance baselines must be approved by the Air Force Service
Acquisition Executive in consultation with the Secretary and the Chief of
Staff of the Air Force. Moreover, the contract contains options for the 175
production aircraft, establishing firm, fixed pricing for two initial production
lots and not-to-exceed pricing for subsequent full-rate production lots.
Program officials maintain that this pricing will likely stay intact as long as
the contract is not opened to negotiate modifications.

The KC-46 contract is one of only a few major weapon system programs
in recent years to employ a fixed-price development contract. In the past,
DOD has typically used cost-reimbursement contracts in which the
government pays all allowable incurred costs to the extent prescribed by
the contract. Legislation and defense policy now directs the Milestone
Decision Authority for a major defense acquisition program to select the
contract type for a development program at the time of a decision on



12
  The Office of Cost Assessment and Program Evaluation provide independent cost
estimates for major DOD weapon system programs.




Page 10                                              GAO-12-366 KC-46 Tanker Aircraft
                           Milestone B that is consistent with the level of program risk for the
                           program. The Milestone Decision Authority may select either a fixed-price
                           type contract (including a fixed-price incentive contract); or a cost type
                           contract. The use of fixed-price contracts, when warranted, limits the
                           government’s exposure to weapon system cost increases. Defense
                           officials believe that a fixed-price development contract is appropriate for
                           this program because KC-46 development is considered to be a relatively
                           low risk effort to integrate mature military technologies onto a well-defined
                           commercial derivative aircraft.

                           In addition to the type of contract used, there are also provisions in the
                           KC-46 development contract that further limit the government’s liability
                           and are intended to help manage performance risk. For example, Boeing
                           has to correct any deficiencies in the KC-46 discovered during the
                           development program. The correction of deficiencies shall be
                           accomplished on the four development test aircraft and all production
                           aircraft, as appropriate, to bring them to the final configuration at no
                           additional cost to the government. In addition, there is a special contract
                           provision that requires each aircraft to demonstrate a certain fuel usage
                           rate before the government accepts the aircraft. If any aircraft burn fuel
                           above this rate, Boeing is required to propose a corrective action at no
                           cost to the government. Boeing is not allowed to propose a relaxation of
                           contract requirements to resolve any fuel usage issues, but if Boeing
                           cannot meet the required usage rates, there are contract provisions
                           allowing for a decrease in the amount paid to Boeing.


Key Performance Goals      The Air Force has identified nine specific KPPs critical to enabling the
Have Been Identified but   KC-46 to meet its primary mission of providing worldwide, day and night,
Metrics for Measuring      adverse weather aerial refueling. Several of these parameters have been
                           established to address performance characteristics that are limited or
Achievement Are Not Yet    nonexistent in the current tanker fleet. For example, in 2005 only 8 KC-
Fully Implemented          135 aircraft (1.5 percent) had the capability to receive fuel from another
                           aerial refueling tanker while airborne. This limited capability can prohibit
                           the extension of aircraft forces and can result in inefficient use of assets.
                           By establishing a KPP to allow for the KC-46 fleet to receive fuel from
                           other tankers, the Air Force hopes to address this shortcoming. Table 4
                           describes the planned KC-46 KPPs.




                           Page 11                                          GAO-12-366 KC-46 Tanker Aircraft
                       Table 4: Description of KC-46 Key Performance Parameters

                        Key performance parameter Description
                        Tanker air refueling capability              Aircraft shall be capable of accomplishing air refueling of
                                                                     all DOD current and programmed (budgeted) receiver
                                                                     aircraft. The aircraft shall be capable of conducting both
                                                                     boom and drogue air refueling on the same mission.
                        Fuel offload versus radius                   Aircraft shall be capable of carrying certain amounts of
                                                                     fuel (to use in air refueling) certain distances.
                        Operate in civil and military                Aircraft shall be capable of worldwide flight operations in
                        airspace                                     all civil and military airspace.
                        Airlift capability                           Aircraft shall be capable of transporting certain amounts
                                                                     of both equipment and personnel.
                        Receiver air refueling                       Aircraft shall be capable of receiving air refueling from
                        capability                                   any compatible tanker aircraft.
                        Force protection                             Aircraft shall be able to operate in chemical and
                                                                     biological environments.
                        Net-ready                                    Aircraft must be able to have effective information
                                                                     exchanges with many other DOD systems to fully
                                                                     support execution of all necessary missions and
                                                                     activities.
                        Survivability                                Aircraft shall be capable of operating in hostile threat
                                                                     environments.
                        Simultaneous multi-point                     Aircraft shall be capable of conducting simultaneous
                        refueling                                    drogue refueling on multiple aircraft.
                       Source: GAO presentation of Air Force data.



                       Near the end of KC-46 development, a series of independent tests and
                       evaluations are planned to validate whether the aircraft meets these
                       KPPs. However, the Air Force still has to fully implement the specific
                       metrics needed to measure progress against the KPPs. In future reports,
                       we will include an evaluation of metrics established for each of these
                       KPPs as well as whether the program is on track to meet them.


                       Schedule risk on the KC-46 program is a concern and technical
Key Events in          challenges will need to be overcome. The program has an accelerated
Program Schedule       schedule with significant overlap, or concurrency, among the
                       development, testing, and production of initial aircraft. Also, while
Are Concurrent and     designing a new tanker that uses a modified commercial platform may not
Technical Challenges   be as technically challenging as an all new weapon system, the program
                       still faces some technical risks, including three critical technologies that
Exist                  have not yet been tested in a realistic environment.




                       Page 12                                                                GAO-12-366 KC-46 Tanker Aircraft
Significant Concurrency               The significant amount of concurrency in the KC-46 schedule among
Poses Risks to KC-46                  planned development, testing, and production activities are highlighted by
Development and                       the shaded area in figure 3.
Production Schedule

Figure 3: Planned KC-46 Program Concurrency between Development and Production




                                      The decision to begin low-rate initial production is scheduled for August
                                      2015, before significant development and testing activities are completed.
                                      While about 6 months of 767-2C flight testing is planned to be conducted
                                      prior to KC-46 flight testing to help prove the aircraft’s design and flying


                                      Page 13                                         GAO-12-366 KC-46 Tanker Aircraft
qualities, only about 60 percent of the dedicated KC-46 development
flight testing is planned to be completed by the start of low-rate initial
production, when the Air Force estimates $1.38 billion will be needed for
seven aircraft. Funding commitments will be required even sooner; DOD
will present the budget request for KC-46 initial production to Congress in
February 2014.

The intent of development flight testing is to demonstrate the maturity of
the design and to discover and fix design and performance problems
while the aircraft is being developed. Beginning production before testing
has successfully demonstrated that the design is mature and that aircraft
will work as intended increases the likelihood of discovering deficiencies
during production, when it is most expensive to correct them. Similarly,
systems already built and fielded may require substantial modifications,
resulting in additional program costs.

The Air Force and Boeing are both concerned about the risks in the KC-
46 development and test schedule. In August 2011, a joint Boeing and Air
Force team completed a detailed review to identify risk associated with
the program’s technology, cost, and schedule. As a result of that review,
the Air Force determined that the schedule, culminating with the delivery
of 18 aircraft by August 2017, contained moderate risk. 13 Other major
areas examined during this review were assessed as low risk.

According to the KC-46 program office, schedule risk stems from four
primary factors:

•    Flight testing. Completing the flight test program on time will require
     efficient, synchronized use of DOD, Air Force, and Federal Aviation
     Administration (FAA) test facilities and resources. The KC-46 program
     office is concerned that Boeing will not be able to achieve planned
     flight test flying hour rates for military certifications and military testing,
     currently set at 50 hours per aircraft per month, given the amount of
     coordination and synchronization of test resources required. Boeing is
     also continuing to evaluate plans for the flight test program due to
     concerns it may contribute to program schedule risk. For these and
     other reasons, DOD’s Office of the Director, Operational Test and



13
  The delivery of these aircraft must be accompanied by all the required training
equipment, support equipment, and the support necessary for their sustainment.




Page 14                                                  GAO-12-366 KC-46 Tanker Aircraft
    Evaluation, has determined that the development test program is not
    executable as planned.
•   In-line provisioning. Boeing typically uses one facility as its
    commercial aircraft production line and another to install military
    modifications on commercial aircraft. However, on the KC-46
    program, Boeing will do extra preparatory work—provisioning—at its
    commercial facility to accommodate the military modifications planned
    at its other facility. This represents an additional requirement to
    prepare the aircraft for military modifications while still on the
    commercial production line. According to the program office, this
    increases the level of risk for accomplishing the work on time.
•   Federal Aviation Administration certification. According to the
    program office, two FAA certifications, one for the commercial 767-2C
    aircraft and a supplemental one for the military modifications planned
    for the commercial aircraft, are required for the KC-46 before it is
    deemed airworthy. Boeing intends to accomplish a portion of both of
    these certifications concurrently, rather than one at a time, which is
    more typical. According to the program office, if problems arise during
    this concurrency, not much time will be left in the schedule for Boeing
    to recover.
•   Software. The program office told us that modifications to commercial
    software to separate classified from unclassified information and
    enable other military capabilities will increase risk associated with
    software development. However, they also stated that they are
    focusing on software early in the program to ensure Boeing puts the
    proper emphasis on this area and keeps the program schedule on
    track.
Boeing has also identified risks in the program’s software development
effort that could delay the program’s schedule or drive increased cost if
realized. Software development growth can occur because of bad
estimates, poor requirements, and poor execution of the software
development plan. If the amount of software being developed grows,
more staff and more time will be needed. There can also be delays in the
integration of hardware and software if software deliveries from suppliers
are late. Late delivery can result in hardware and software not being
integrated in time to support flight testing, which in turn can mean flight
test schedule delays.

A further complication to the KC-46 schedule was Boeing’s January 2012
announcement that it was closing its Wichita, Kansas finishing facility at
the end of 2013. When the contract was awarded, Boeing had planned to
militarize the KC-46 at the Wichita facility. Now, that work will be moving
to the Puget Sound facility in Seattle, Washington to be co-located with



Page 15                                         GAO-12-366 KC-46 Tanker Aircraft
                            the 767-2C development effort. KC-46 program officials stated that they
                            are working closely with Boeing to understand the impact of this decision
                            on the KC-46 program but will hold Boeing to its contractual delivery date
                            of August 2017.

                            If the provisions in the current contract remain intact, the government’s
                            cost liability will be safeguarded should any of the foregoing risks
                            materialize into problems. However, these provisions cannot prevent
                            delays in delivering aircraft should problems be discovered late in
                            development or while production is underway.


KC-46 Will Have Some Risk   While a tanker largely based on a commercial platform and subsystems
Stemming from New           may not be as technically challenging as developing a wholly new
Technical Content           weapon system like the Joint Strike Fighter, DOD regulations still require
                            requisite critical technologies to be sufficiently mature prior to starting
                            system development in order to minimize technology risk down the road.
                            As required by DOD policy, a technology readiness assessment was
                            conducted by an independent team of subject matter experts. Overall, the
                            team reviewed and assessed 36 technologies and determined that three
                            are new or novel and are needed for the KC-46 tanker to meet
                            performance and mission capabilities. These three technologies—3-
                            Dimensional Display, Airborne ESTAR, and Threat Correlation
                            Software—have been demonstrated in a relevant environment 14 in
                            accordance with DOD and statutory requirements. 15

                            •    Three-Dimensional Display. The display screens at boom operator
                                 stations inside the KC-46 aircraft provide the visual cues needed for
                                 the operator to monitor the aircraft being refueled before and after
                                 contact with the refueling boom or drogue. The images of the aircraft
                                 on the screens are captured by a pair of cameras outside that aircraft
                                 that are meant to replicate the binocular aspect of human vision by
                                 supplying an image from two separate points of view, replicating how



                            14
                              GAO has previously defined technology readiness level 6 to mean that a model or
                            prototype close to final form, fit and function has been tested in a high fidelity laboratory
                            environment or in a simulated operational environment. GAO, Defense Acquisitions:
                            Assessments of Selected Weapon Programs, Appendix III, GAO-09-326SP (Washington,
                            D.C.: March 2009).
                            15
                             10 U.S.C. Section 2366b(a)(3)(D); Department of Defense Instruction 5000.02,
                            Operation of the Defense Acquisition System, enc. 2, para. 5.d. (4) (Dec. 8, 2008).




                            Page 16                                                    GAO-12-366 KC-46 Tanker Aircraft
     humans see two points of view, one for each eye. The resulting image
     separation provides the boom operator with greater fidelity and a
     more realistic impression of depth, or a third dimension. Similar
     technology has been used on two foreign-operated refueling aircraft
     and a representative model in tests with other Boeing tankers.
•    Airborne ESTAR. This software module is planned to have an
     algorithm that allows for automatically re-routing and constructing new
     flight paths for the aircraft that are safe, flyable, and avoid potential
     threats. The algorithm is new and novel technology, critical to meeting
     operational requirements. Airborne ESTAR has been tested in a
     simulation that provided data on its performance, interfaces, and
     functionality.
•    Threat Correlation Software. Somewhat similar to Airborne ESTAR,
     this new software module serves to correlate tracks from multiple
     potential threats and automatically help re-route the tanker’s flight
     path to avoid them.
These technologies have not yet been demonstrated in a realistic
environment, a higher level of maturity that is a best practice. 16 We have
previously reported that programs that began development with
technologies demonstrated to this level experienced less cost growth than
programs with less mature technologies. 17 To the extent that alternatives
or workarounds are available for any of the KC-46’s technologies, these
risks would be mitigated.

In addition to the critical technologies identified, the KC-46 program office
identified other integration and technical areas where management will
need to focus efforts to mitigate risk. The program office identified the
following three areas as being among the more significant:

•    Radar Warning Receiver integration. A radar warning receiver
     warns a pilot that a threat aircraft’s radar is tracking the KC-46, but



16
  GAO has previously defined technology readiness level 7 to mean that an actual system
prototype has been integrated with key supporting subsystems to demonstrate full
functionality and flight-tested in a realistic operational environment. GAO, Defense
Acquisitions: Assessments of Selected Weapon Programs, Appendix III, GAO-09-326SP
(Washington, D.C.: March 2009). Our extensive body of work in commercial best practices
suggests that this higher standard be attained for each critical technology before a new
acquisition enters system development.
17
 GAO, Defense Acquisitions: Assessments of Selected Weapon Programs,
GAO-11-233SP (Washington, D.C.: Mar. 29, 2011).




Page 17                                                GAO-12-366 KC-46 Tanker Aircraft
                           integrating such a receiver on a large commercial airframe can be
                           challenging. Integration requires a unique antenna design and certain
                           provisions for installation to maximize performance. Any late changes
                           to the location of the receiver’s antennae or software could drive cost
                           and schedule impacts to the program.
                       •   Wing Aerial Refueling Pod instability. Based on lessons learned
                           from another Boeing refueling aircraft, a new aerial refueling pod
                           design was introduced for the KC-46 to reduce buffeting, or instability,
                           of the aircraft’s wing. The new design also made changes to the way
                           the refueling hose exits the pod, so now there is concern about the
                           hose not being stable. If the new wing pod design has technical
                           shortcomings and introduces hose stability issues, this would not
                           meet program requirements.
                       •   Aircraft Weight. The current aircraft weight forecast is near the
                           aircraft’s weight limit and, historically, weight continues to increase
                           during a weapon system program development phase. Not achieving
                           the target weight will make the aircraft unable to carry the required
                           amount of fuel for its aerial refueling mission.

                       The KC-46 program’s acquisition strategy and business case generally
With Some              meet GAO’s knowledge-based acquisition approach and best acquisition
Exceptions, the        practices, including those in legislation to improve the weapon system
                       acquisition process. Also, the contents of the program’s requirements
Program’s              documentation generally comply with DOD guidance. However, the
Development Strategy   program did not conform to best practices in a few instances. The
Generally Adheres to   program did not conduct a technology development phase and instead
                       proceeded directly to the system development phase, and our prior work
Best Practices,        has shown that programs proceeding directly to a development phase
Acquisition Reform     typically have more problems. The program also received a waiver from
                       having to conduct a preliminary design review, considered important to
Legislation, and DOD   initially solidifying the aircraft’s design, before beginning development.
Policy                 Instead, the design review is planned for March 2012, about a year after
                       the start of development.




                       Page 18                                         GAO-12-366 KC-46 Tanker Aircraft
Program Is Generally       For the most part, the KC-46 program’s acquisition framework and plans
Implementing Acquisition   compare favorably with the standards and requirements in GAO’s best
Best Practices             practices work on weapon system acquisition development. The
                           program’s Acquisition Strategy 18 establishes the decision points and
                           acquisition phases planned for the program. It also covers development,
                           testing, production, and life-cycle support and establishes the
                           requirements for each phase, and also identifies critical management
                           events and risks including integration of military hardware and software
                           on the KC-46 airframe. The program’s Integrated Baseline Review (IBR) 19
                           resulted in a mutual understanding between the KC-46 program office
                           and Boeing ensuring all system capabilities are understood and program
                           requirements are flowed down to the contractor and suppliers. A
                           comprehensive risk assessment also identified all program risks, and
                           assigned moderate risk to the program’s development schedule.

                           The program is also starting to establish a knowledge-based acquisition
                           approach, in which knowledge of various components of the process is
                           acquired at key decision points before proceeding. Our best practices
                           model helps decision makers to be reasonably certain about their
                           products at critical junctures during development and to make informed
                           investment decisions. This knowledge-based process can be broken
                           down into three cumulative knowledge points.

                           •    Knowledge point 1: A match must be made between the customer’s
                                needs and the developer’s available resources—technology,
                                engineering knowledge, time, and funding—before a program starts.
                           •    Knowledge point 2: The product’s design must be stable and must
                                meet performance requirements before initial manufacturing begins.
                           •    Knowledge point 3: The product must be able to be produced within
                                cost, schedule, and quality targets and demonstrated to be reliable
                                before production begins.




                           18
                             The Acquisition Strategy is a comprehensive, integrated plan that identifies the
                           acquisition approach, and describes the business, technical, and support strategies that
                           management will follow to manage program risks and meet program objectives.
                           19
                             Integrated Baseline Review is a formal review conducted by the government program
                           manager and technical staff, jointly with their contractor counterparts, following contract
                           award to verify the technical content of the performance measurement baseline and the
                           accuracy of the related resource (budgets) and schedules.




                           Page 19                                                    GAO-12-366 KC-46 Tanker Aircraft
Figure 4 depicts how the KC-46 program office is incorporating a best
practices approach into its acquisition framework including the planned
dates key events are scheduled and how the plan compares to GAO’s
knowledge-based process for development. As the program progresses,
we will continue to assess its performance against acquisition best
practices, using figure 4 as a template.




Page 20                                      GAO-12-366 KC-46 Tanker Aircraft
Figure 4: KC-46 Planned Program Events Compared to GAO Best Practices




                                      Page 21                           GAO-12-366 KC-46 Tanker Aircraft
Program Did Not Have a      Although the program is implementing many acquisition best practices,
Technology Development      the program office did not conduct a technology development phase and
Phase and Waived            instead proceeded directly to the engineering and manufacturing
                            development phase. As discussed earlier, the program’s three critical
Preliminary Design Review   technologies were assessed as approaching maturity and meeting
                            internal defense policy, but below the fully mature level in best practices.
                            Our prior work consistently shows that programs going directly into
                            development before fully maturing all critical technologies typically incur
                            additional costs and take longer to complete. Additionally, DOD granted a
                            waiver to the program from having to conduct a preliminary design
                            review—a major step initially solidifying the aircraft’s design—before
                            starting system development. Instead, the program office has plans to
                            conduct this review over a year after the start of development in March
                            2012 due to their assessment that integrating KC-46 unique military
                            requirements onto a commercial aircraft is low to moderate risk. We have
                            previously reported that holding a preliminary design review prior to
                            development start can help ensure requirements are well-defined and
                            feasible. 20 Nonetheless, the program did complete its system functional
                            review in November 2011 and made no significant changes to program
                            requirements. The program plans to demonstrate the system’s design is
                            stable and have 90 percent of KC-46 design drawings released by its
                            projected July 2013 critical design review.


KC-46 Program is            The Weapon Systems Acquisition Reform Act of 2009 (Reform Act) 21
Incorporating Recent        requires DOD and the military services to place more emphasis on
Acquisition Reform          activities that should occur early in weapon systems development,
                            including those related to systems engineering and developmental
Legislation in
                            testing, to establish a solid program foundation when development
Development                 begins. To comply with this legislation, the KC-46 program office is
                            tracking key program events to the relevant section of the Reform Act.
                            For example, the program office held an independent Technology
                            Readiness Assessment (TRA) which reviewed 36 technologies, identified
                            3 as critical technologies, and assessed the maturity of all the




                            20
                              GAO, Defense Acquisitions: Application of Lessons Learned and Best Practices in the
                            Presidential Helicopter Program, GAO-11-380R (Washington, D.C.: Mar. 25, 2011).
                            21
                             Pub. L. No. 111-23.




                            Page 22                                                GAO-12-366 KC-46 Tanker Aircraft
                         technologies. 22 In addition, the KC-46 program is using a time-defined
                         acquisition strategy based on cost, schedule, and performance trades
                         with a 78-month development cycle and is using an incremental strategy
                         to replace the tanker fleet of KC-135s and KC-10s with the KC-46, and
                         potentially the KC-Y and KC-Z programs. The Reform Act requires DOD
                         to periodically review and assess the technology maturity and the risk of
                         integrating critical technologies of weapon system programs, and requires
                         officials responsible for acquisition, budget, and cost estimating functions
                         to develop estimates and raise cost and schedule matters before
                         performance objectives are established. Appendix III provides a
                         comparison of the Reform Act requirements and program compliance.


Key Program              The KC-46 key program documentation completed prior to development
Documentation Complies   start compares favorably with requirements in DOD policy for defining
with DOD Policy          program capabilities and system requirements as outlined in the Joint
                         Capabilities Integration and Development System (JCIDS) 23 manual.
                         Appendix IV provides a detailed assessment of this compliance, but some
                         examples include:

                         •   The Initial Capabilities Document (ICD) 24 identifies capability gaps
                             with the KC-135 fleet in the areas of night-time refueling systems,
                             defensive systems, and communication capabilities. It defines what
                             capabilities will be required in a new tanker aircraft.
                         •   The KC-46 Capability Development Document (CDD) 25 describes how
                             capability gaps identified in the ICD will be addressed by developing


                         22
                           A TRA is a formal, systematic, metrics-based process and accompanying report that
                         assesses the maturity of technologies called Critical Technology Elements (CTEs) to be
                         used in systems. CTEs can be hardware or software. DOD Technology Readiness
                         Assessment Deskbook, section 1.1.
                         23
                           JCIDS plays a key role in identifying the capabilities required by the warfighters to
                         support the National Defense Strategy, the National Military Strategy, and the National
                         Strategy for Homeland Defense. Successful delivery of those capabilities relies on the
                         JCIDS process working in concert with other joint and DOD decision processes.
                         24
                           The ICD defines a capability gap or other deficiency in terms of the functional area, the
                         relevant range of military operations, and the timeframe. It also describes the evaluation of
                         Doctrine, Organization, Training, Materiel, Leadership and education, Personnel, and
                         Facilities (DOTMLPF) approaches.
                         25
                           The CDD is a document that captures the information necessary to develop a proposed
                         program(s), normally using an evolutionary acquisition strategy. It outlines an affordable
                         increment of militarily useful, logistically supportable, and technically mature capability.




                         Page 23                                                   GAO-12-366 KC-46 Tanker Aircraft
                   KPPs, system characteristics that are considered to be critical to
                   delivering a military capability, and Key System Attributes, lower
                   priority characteristics which are nevertheless essential for effective
                   military capability. The KC-46 CDD defines how each KPP will be
                   addressed in areas including aerial refueling and threats, and how
                   classified information is to be collected and stored.
              •    The KC-46 System Requirements Document (SRD) 26 discusses the
                   scope of program requirements and presents the technical
                   performance required for the replacement tanker. The SRD also
                   defines how some minimum performance requirements are
                   mandatory, and how other requirements identified as non-mandatory
                   are part of the Air Force’s trade space. 27 System requirements
                   discussed in the KC-46 SRD included aerial refueling, airlift,
                   information management, and survivability.

              The KC-46 acquisition is a high-priority/high-profile program essential to
Conclusions   ensuring continued delivery of aerial refueling capabilities to future U.S.
              military operations. Its fixed-price incentive (firm target) development
              contract is designed to limit the government’s liability for increased costs.
              Because senior defense officials are encouraging acquisition programs
              across the department to adopt similar arrangements, when appropriate,
              it will be both illustrative for the policy and important for future programs
              to monitor the KC-46’s progress and its degree of success. Some would
              argue that a degree of program success has already been demonstrated
              because the government’s cost liability, assuming no system
              requirements changes, has been capped and the contractor is still
              required to provide full performance of the contract. However, even with
              these safeguards, it is important to note that 1 year into development, Air
              Force and contractor development cost estimates exceed the
              development contract amount and significant schedule risks have been
              identified. Although the KC-46 program is still in its early stages, similar
              cost and schedule pressures have dogged many past and present


              26
                A SRD establishes the basis for an acquisition program functional baseline. It
              documents acquisition requirements translated from a warfighter Capability Based
              Requirements document into an acquisition format used as a baseline for a system or
              subsystem specification typically prepared by a contractor.
              27
                Trade space can be defined as the set of program and system parameters, attributes,
              and characteristics required to satisfy performance standards. Decision makers define and
              refine the developing system by making tradeoffs with regard to cost, schedule, risk, and
              performance; all of which fall within the system’s trade space.




              Page 24                                                 GAO-12-366 KC-46 Tanker Aircraft
                      defense acquisition programs. With 5 years of development remaining on
                      an aggressive schedule with substantial concurrency among
                      development, test, and production activities, prudence and strong
                      management attention is warranted. Should costs continue to increase, or
                      schedule or performance measurement lag, there could be increased
                      pressure to reopen or renegotiate aspects of the contract. This would
                      probably not be advantageous to the Air Force.


                      As one of only a few major acquisition programs to award a fixed-price
Recommendations for   incentive (firm target) development contract in recent years, evaluating
Executive Action      performance and identifying lessons learned will be very illustrative and
                      important to inform decision-makers and help guide and improve future
                      defense acquisition programs. Therefore, we recommend that the Under
                      Secretary of Defense for Acquisition, Technology and Logistics closely
                      monitor the cost, schedule, and performance outcomes of the KC-46
                      program to identify positive or negative lessons learned.

                      To help ensure that progress toward achievement of the program’s key
                      performance parameters can be appropriately measured as development
                      progresses toward production, we recommend the KC-46 program
                      manager, as soon as possible, fully implement sound metrics for each
                      parameter.



                      DOD provided us with written comments on a draft of this report which
Agency Comments       are reprinted in appendix V. DOD concurred with our two
                      recommendations. In written comments, DOD provided additional
                      information on its plans to manage schedule risk and mature
                      technologies. We also incorporated technical comments as appropriate.


                      We are sending copies of this report to appropriate congressional
                      committees; the Secretary of Defense; the Secretary of the Air Force; and
                      the Director of the Office of Management and Budget. The report also is
                      available at no charge on the GAO Web site at http://www.gao.gov.




                      Page 25                                        GAO-12-366 KC-46 Tanker Aircraft
If you or your staff has any questions concerning this report, please
contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff contributing to this report are
listed in appendix VI.




Michael J. Sullivan
Director
Acquisition and Sourcing Management




Page 26                                         GAO-12-366 KC-46 Tanker Aircraft
List of Committees

The Honorable Carl Levin
Chairman
The Honorable John McCain
Ranking Member
Committee on Armed Services
United States Senate

The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Ranking Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable Howard P. McKeon
Chairman
The Honorable Adam Smith
Ranking Member
Committee on Armed Services
House of Representatives

The Honorable C.W. Bill Young
Chairman
The Honorable Norman D. Dicks
Ranking Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives




Page 27                          GAO-12-366 KC-46 Tanker Aircraft
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             We interviewed officials from the KC-46 program, Air Force, and Office of
             the Secretary of Defense (OSD) to obtain their views on progress,
             ongoing concerns and actions taken to address them, and future plans to
             complete KC-46 development. We also reviewed key program
             documentation for compliance with current Department of Defense (DOD)
             policy, acquisition reform legislation, and GAO best practices for weapon
             system development.

             To determine the program’s acquisition strategy, including its contracting
             approach, we reviewed briefings by program and contractor officials,
             budget documents, the Acquisition Program Baseline (APB), the Selected
             Acquisition Report (SAR), monthly activity reports, performance
             indicators, risk assessments and other data. We identified changes in
             cost and schedule, and obtained officials’ reasons for these changes, and
             reviewed the KC-46 acquisition strategy in order to identify the program’s
             Key Performance Parameters and what measures the program office has
             taken to develop metrics and track contractor performance in these areas.
             We also examined the acquisition strategy for aircraft development and
             production, but we could not assess the contractor’s manufacturing
             processes because the program is only one year into development and it
             is too early for this assessment. To assess the development contract
             structure, we reviewed and analyzed the factors used to determine the
             contract geometry: target cost, target profit, ceiling amount, and profit
             adjustment formula for the current contract and also compared this
             against current DOD policy for contract geometry, the Federal Acquisition
             Regulation, and the Fiscal Year 2007 National Defense Authorization Act.
             To determine program costs, we reviewed the OSD Cost Assessment
             and Program Evaluation Independent Cost Estimate and the Air Force’s
             Service Cost Position, the estimate which is used by the KC-46 program
             to plan its expected costs. We reviewed each estimate’s underlying
             assumptions including how the estimate was developed and the
             confidence level used. We also requested information from the program
             office on whether the SCP cost estimate followed guidelines in GAO’s
             2009 Cost Estimating Guide.

             In order to evaluate the major schedule and technical risks faced by the
             program, we reviewed the KC-46 Integrated Master Schedule and
             compared it to the program’s APB and SAR in order to identify potential
             concurrency in the program’s design reviews, flight testing, and low rate
             production. We also asked program officials how they are monitoring
             planned schedule events. To identify potential program risks, we
             reviewed the program’s Technology Readiness Assessment which
             identifies critical technology elements and the plan for maturation of these


             Page 28                                         GAO-12-366 KC-46 Tanker Aircraft
Appendix I: Scope and Methodology




technologies. During interviews with program officials we discussed what
actions are currently being taken in the areas of earned value
management and contractor performance in order to identify problems
early in the engineering and manufacturing development phase and ways
they planned to mitigate these risks.

To assess the extent the program is complying with acquisition policy,
legislation, and best practices, we also compared key program
documentation and execution with current DOD policy, GAO best
practices, and recent acquisition reform legislation to determine areas of
compliance and areas for further review as the program continues
forward. We compared the KC-46 Initial Capabilities Document, the
Capability Development Document, and the System Requirements
Document against DOD policy and guidance. We also reviewed program
office documentation pertaining to implementing relevant portions of the
Weapon Systems Acquisition Reform Act of 2009 and compared program
actions back to the legislation to determine whether requirements in the
Reform Act are being incorporated into program decisions. We also
examined and compared program office schedule documentation, such
as the Integrated Baseline Review against GAO’s best practices
acquisition framework to identify areas in which the program office is
utilizing a knowledge-based approach in KC-46 development.

In performing our work, we obtained information or interviewed officials
from Air Mobility Command and the KC-46 program office, Wright-
Patterson Air Force Base, OH; Defense Contract Management Agency,
Seattle, WA; and Federal Aviation Administration, Wichita, KS. We also
met with and obtained information from the Office of the Under Secretary
of Defense for Acquisition, Technology, and Logistics, in Washington,
D.C.

We conducted this performance audit from September 2011 to March
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




Page 29                                        GAO-12-366 KC-46 Tanker Aircraft
Appendix II: KC-135 Fleet Capabilities
              Appendix II: KC-135 Fleet Capabilities
              Compared to KC-46 Planned Capabilities for
              Aerial Refueling


Compared to KC-46 Planned Capabilities for
Aerial Refueling




              Page 30                                      GAO-12-366 KC-46 Tanker Aircraft
Appendix III: DOD and KC-46 Program Office
                                           Appendix III: DOD and KC-46 Program Office
                                           Implementation of Applicable Sections of the
                                           2009 WSARA


Implementation of Applicable Sections of the
2009 WSARA

                                                                                               DOD and KC-46 Program Office
WSARA Section                    Requirement                                                   Implementation
Title I: Acquisition Organization
Section 104: Assessment of       Requires Director, Defense Research & Engineering             •   An independent Technology
Technological Maturity of        (DDR&E) to periodically review and assess the technology          Readiness Assessment (TRA),
Critical Technologies of Major   maturity and integration risk of critical technologies of         approved by DDR&E
Defense Acquisition Programs     Major Defense Acquisition Programs (MDAP). Requires           •   The assessment reviewed 36
by the Director of Defense       DDR&E to develop knowledge-based standards to                     technologies, identified 3 critical
Research and Engineering         measure technology maturity and integration risk.                 technologies elements, and
                                                                                                   assessed them as mostly mature
Title II: Acquisition Policy
Section 201: Consideration of    The Secretary of Defense shall ensure consideration of        •   KC-46 System Requirements
Trade-Offs among Cost,           trade-offs among cost, schedule, and performance                  Document reduced requirements to
Schedule & Performance           objectives as part of the process for developing                  372 mandatory and 93 non-
Objectives in DOD Acquisition    requirements for DOD acquisition programs. DOD officials          mandatory that represented
Programs                         responsible for acquisition, budget, and cost estimating          capability trade space
                                 functions shall provide appropriate opportunity to develop    •   Time-defined acquisition strategy
                                 estimates and raise cost and schedule matters before              based on cost, schedule,
                                 performance objectives are established. The process for           performance trades (78 month
                                 developing requirements is structured to enable                   development cycle)
                                 incremental, evolutionary, or spiral acquisition
                                                                                               •   Employing incremental KC-46, KC-
                                 approaches.
                                                                                                   Y, and KC-Z strategy
Section 202: Acquisition         Requires DOD to implement recommendations to ensure           •   Contractor must support design,
Strategies to Ensure             competition at the MDAP contract and subcontract level.           certification, approval and
Competition Throughout the       Highlights several measures to ensure competition, where          installation of future third party
Lifecycle of Major Defense       cost-effective.                                                   contractor modifications at best
Acquisition Programs                                                                               commercially available terms and
                                                                                                   conditions
                                                                                               •   Employing incremental KC-46, KC-
                                                                                                   Y and KC-Z strategy
Section 203: Prototyping         Requires the acquisition strategy for each MDAP provide       •   Waiver from competitive prototype
Requirements for Major           for competitive prototypes before Milestone B approval,           was not required for KC-46
Defense Acquisition Programs     unless the milestone decision authority (MDA) for that            because the program entered the
                                 MDAP waives such requirement. Allows the MDA to waive             acquisition system directly at MS B
                                 the requirement only on the basis that: (1) the cost of           with no prior Technology
                                 producing competitive prototypes exceeds the expected             Development Phase
                                 life-cycle benefits of producing the prototypes; or (2) but
                                 for such waiver, DOD would be unable to meet critical
                                 national security objectives.
Title III: Additional Acquisition Provisions
Section 302: Earned Value        Modifies the 2009 National Defense Authorization Act,         •   KC-46 has successfully
Management                       Section 887, requires report to Congress on                       implemented all EVM and
                                 implementation of Earned Valued Management (EVM) in               Integrated Baseline Review (IBR)
                                 DOD.                                                              requirements according to statute
                                                                                                   and regulation




                                           Page 31                                                    GAO-12-366 KC-46 Tanker Aircraft
                                            Appendix III: DOD and KC-46 Program Office
                                            Implementation of Applicable Sections of the
                                            2009 WSARA




                                                                                                                DOD and KC-46 Program Office
WSARA Section                    Requirement                                                                    Implementation
Section 304: Comptroller         Requires reports on growth in operating and support                            •   KC-46 program measuring and
General of the United States     (O&S) costs and requires review of weaknesses in                                   reporting on O&S costs
Reports on Costs and Financial   operations affecting the reliability of financial information
Information Regarding Major      for MDAPs.
Defense Acquisition Programs
                                            Source: GAO presentation of 2009 Weapon System Acquisition Reform Act (WSARA) legislation and KC-46 Program Office information
                                            provided to show compliance with WSARA.




                                            Page 32                                                                        GAO-12-366 KC-46 Tanker Aircraft
Appendix IV: KC-46 Program Compliance
                                            Appendix IV: KC-46 Program Compliance with
                                            Key Requirements Documents



with Key Requirements Documents


Requirements Document           Specific Requirement                       Program Compliance
Initial Capabilities Document   •  Description of Concept of               •    Aerial refueling aircraft will be rapidly deployable, employable,
                                   Operations                                  and sustainable throughout global battlespace and
                                                                               environments
                                •   Capability Gap                         •   Continued successful accomplishment of the crucial aerial
                                                                               refueling mission is at risk due to increasing demands (already
                                                                               exceeding capability and decreasing availability) as a result of
                                                                               aircraft aging
                                •   Operational Environment                •   Mission requirements dictate aerial refueling aircraft must be
                                    Threat                                     capable of operating from worldwide locations day and night,
                                                                               under most operational atmospheric conditions and contain
                                                                               appropriate command, control, communications, and
                                                                               intelligence interfaces and capability for inter-aircraft situational
                                                                               awareness
Capability Development          •   Capability Discussion                  •     Provide worldwide, day/night, adverse weather aerial refueling
Document                                                                         on the same sortie to receiver capable US, allied, and coalition
                                                                                 aircraft
                                •   Concept of Operations                  •     Aerial refueling is integral to all Air Force core competencies
                                    Summary                                      and is used throughout the full spectrum of operations from
                                                                                 combat to humanitarian support, including strategic attack,
                                                                                 counterair, special operations, counterland, countersea,
                                                                                 combat search and rescue, and airlift mission areas
                                •   Threat Summary                         •     Tanker aircraft must be able to operate in chemical, biological,
                                                                                 and radiological environments as potential adversaries
                                                                                 continue to enhance these capabilities
System Requirements             •   Scope                                  •     Presents the technical performance required for the
Document                                                                         replacement tanker aircraft
                                •   Purpose                                •     Tanker and Boom Aerial Refueling
                                                                           •     Computer Resources
                                                                           •     FAA Certification and Air Worthiness
                                •   Description                            •     Verification Factors/Methods
                                                                           •     Testing and Analysis
                                                                           •     Inspection
                                            Source: GAO presentation of DOD and Air Force information.




                                            Page 33                                                             GAO-12-366 KC-46 Tanker Aircraft
Appendix V: Comment from the Department
             Appendix V: Comment from the Department of
             Defense



of Defense




             Page 34                                      GAO-12-366 KC-46 Tanker Aircraft
Appendix V: Comment from the Department of
Defense




Page 35                                      GAO-12-366 KC-46 Tanker Aircraft
Appendix V: Comment from the Department of
Defense




Page 36                                      GAO-12-366 KC-46 Tanker Aircraft
Appendix V: Comment from the Department of
Defense




Page 37                                      GAO-12-366 KC-46 Tanker Aircraft
Appendix V: Comment from the Department of
Defense




Page 38                                      GAO-12-366 KC-46 Tanker Aircraft
Appendix VI: GAO Contacts and
                  Appendix VI: GAO Contacts and
                  Acknowledgments



Acknowledgments

                  Michael Sullivan (202) 512-4841 or sullivanm@gao.gov
GAO Contact
                  In addition to the contact name above, the following staff members made
Acknowledgments   key contributions to this report: Bruce Fairbairn, Assistant Director; Keith
                  Hudson; John Krump; Mary Jo Lewnard; Don Springman; Roxanna Sun;
                  and Robert Swierczek.




(121016)
                  Page 39                                         GAO-12-366 KC-46 Tanker Aircraft
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